TCS Daily

World Bank-rupt

By Desmond Lachman - May 2, 2005 12:00 AM

All too much of the discussion of Paul Wolfowitz's recent nomination to be President of the World Bank has focused on one issue. How effective can the architect of the Iraq war be in working with countries that might be opposed to that war? This is a great pity. For it diverts attention from the more pertinent questions now facing the World Bank. Is not the Bank in need of fundamental restructuring in today's very changed world of global finance? Might not somebody of Mr. Wolfowitz's undisputed ability and vision be the right person to effect such basic change?

Like all too many of the multilateral lending agencies, the World Bank has not changed nearly enough with the times. As highlighted in 2000 by the bipartisan Meltzer Commission Report, when the World Bank opened its doors to business in 1946, international capital flows were negligible. Precisely for that reason, the new bank was set up to channel funds to those European countries, which had been ravaged by war and which were desperate for capital funds needed for their reconstruction.

Today's open and dynamic global financial markets could hardly be more different from those in 1946. Foreign direct investment and massive private portfolio flows, rather than official capital flows, are now the key fuel to development finance. And the World Bank today is but a small player in cross border flows to the emerging market economies. Yet the Bank persists in focusing over 70 percent of its lending to a dozen or so of the larger and more developed emerging market economies, which have more than ample access to the private capital market. By so doing, it short changes the poorest of the poor nations, which so desperately need the Bank's support.

In today's changed world, one may well ask what is the Bank doing in continuing to lend to a China which is presently sitting on a mountain of no less than US$650 billion in international reserves and which is attracting over US$50 billion a year in foreign direct investment? Or what is the Bank doing in lending to a Brazil, an India, a Mexico, or a Russia, which too are all flush with international reserves and which have investment bankers constantly beating on their doors to lend them more money?

The sheer folly of the World Bank continuing to lend predominantly to middle-income emerging market economies is borne out by the Bank's own recent evaluation of how well the Bank is doing in meeting the Millennium Development Goals. Those goals, which had been set by the international community in 2000, aim at halving extreme global poverty by 2015.

According to the Bank's recent Global Monitoring Report, certain progress has been made in reducing poverty in those middle income countries, which can readily access global financial markets and which are not in need of Bank funds. However, the report very clearly indicates that the Bank is miserably failing to meet its poverty reduction goals in the poorer countries of the world. Indeed, it suggests that on present trends, the absolute number of poor people will continue to rise in sub-Saharan Africa, Latin America, and Central Asia.

The Bank's own findings would seem to support the radical reform proposals made by the earlier Meltzer Commission Report. The most important of Meltzer's recommendations was that the Bank should phase out its lending operations to the richer developing countries with ample access to international finance. This would allow the Bank to refocus its activities on the World's poorest countries.

Meltzer also suggested that the Bank should cancel its claims against the highly indebted poor countries and in the future it should stop the pretense of "lending" for poverty relief. Instead, the Bank would do better to provide grants to the poorest countries in return for action rather than mere promises in delivering services.

One certainly does not want to minimize the enormity of the challenge Mr. Wolfowitz faces in fundamentally reforming the World Bank in today's highly politicized world. However, one also does not want to minimize the Mr. Wolfowitz's capacity to rise to that challenge. Might it not be better to have someone at the Bank's helm of Mr. Wolfowitz's undoubted intellectual and administrative capability, with the full support of the Bank's main shareholder? Surely this would be preferable to having yet another consensus candidate as president, who would soon be co-opted by this bureaucratic behemoth to maintain the status quo to the detriment of the world's poorest nations.

The author is Resident Fellow, American Enterprise Institute


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